Tuesday, May 10, 2005
Quest for short term profits changes business practices
The push for higher returns on investment, especially in the short term, has wide-reaching affect on many sectors of society.
Here is an example where a proposed merger was stopped by hedge fund managers.
The Deutsche Borse wanted to buy the London Stock Exchange.
Regardless of your opinion of the merits of the transaction, hedge funds are not shareholders in the traditional sense. They don't plan on holding the underlying stock for extended periods of time and they have very little interest in the underlying business. They are solely interested in make money from offsetting one gamble against another.
The key quotes from the March 8, 2005 NY Times article:
'But when Mr. Seifert, the chief executive of Deutsche Börse, finally withdrew his bid on Sunday night, it was the resistance of his own shareholders, not the elusiveness of his quarry, that doomed the campaign.
In the process, these investors - mostly but not only hedge funds - sent a signal across the German corporate landscape that they were a muscular new constituency that would demand to be heard in boardrooms.
"We believe the proposed transaction would have been value-enhancing for Deutsche Börse shareholders," Mr. Seifert said in a statement.
"At the same time, we recognize that a significant portion of our shareholder base is focused on return of capital in the short term."'
Investors in hedge funds, mutual funds, retirement plans and the like have been led to believe that they should expect high returns. Many polls indicate that average investors think yields should be in the 10-30% range per year. Funds which fail to deliver are rapidly dropped by investors.
Part of the underlying Social Security privitization scheme is based upon the assumptions about the expected returns on equity investments.
Rather than repeat all my arguments here I refer interested readers to my short essay:
Taking Responsibility
For the impatient, the conclusion is that expecting more than 2-3% above the rate of inflation is not borne out by history. And it our own greed that has led to outsourcing and other ills as business is forced to sacrifice everything to satisfy the investing public.
In the words of the immortal philosopher, Pogo 'Possum: "We have met the enemy and he is us."
Here is an example where a proposed merger was stopped by hedge fund managers.
The Deutsche Borse wanted to buy the London Stock Exchange.
Regardless of your opinion of the merits of the transaction, hedge funds are not shareholders in the traditional sense. They don't plan on holding the underlying stock for extended periods of time and they have very little interest in the underlying business. They are solely interested in make money from offsetting one gamble against another.
The key quotes from the March 8, 2005 NY Times article:
'But when Mr. Seifert, the chief executive of Deutsche Börse, finally withdrew his bid on Sunday night, it was the resistance of his own shareholders, not the elusiveness of his quarry, that doomed the campaign.
In the process, these investors - mostly but not only hedge funds - sent a signal across the German corporate landscape that they were a muscular new constituency that would demand to be heard in boardrooms.
"We believe the proposed transaction would have been value-enhancing for Deutsche Börse shareholders," Mr. Seifert said in a statement.
"At the same time, we recognize that a significant portion of our shareholder base is focused on return of capital in the short term."'
Investors in hedge funds, mutual funds, retirement plans and the like have been led to believe that they should expect high returns. Many polls indicate that average investors think yields should be in the 10-30% range per year. Funds which fail to deliver are rapidly dropped by investors.
Part of the underlying Social Security privitization scheme is based upon the assumptions about the expected returns on equity investments.
Rather than repeat all my arguments here I refer interested readers to my short essay:
Taking Responsibility
For the impatient, the conclusion is that expecting more than 2-3% above the rate of inflation is not borne out by history. And it our own greed that has led to outsourcing and other ills as business is forced to sacrifice everything to satisfy the investing public.
In the words of the immortal philosopher, Pogo 'Possum: "We have met the enemy and he is us."
